Mind the splash…
In today's Guardian:
Imagine you are an investor who has bought financial assets in a country that's running a trade deficit of 5.8% of its national output. Imagine, also, that the size of that deficit grew by 17.5% last year…The country we are talking about is not Mexico or Thailand but the United States, which yesterday announced a record trade deficit of $726bn (£415bn) for 2005…Clearly, trade deficits of 6% of GDP are unsustainable. Clearly, the dollar has to fall. Simple game theory suggests that there is a real advantage in being the first central bank to move.
So the American economy looks set to do a Peter Kay-esque running bomb and surely we're all going to get soaked?
Well, yes and no. Stock markets will take a big hit if economies – especially Asian ones – start selling dollars. But in reality, this is surely just going to be a blip. Won't there be a certain amount of relief in the City and other institutions if the inevitable finally happens and the dollar finally comes down to a more sustainable position? Won't it reel in President Bush's unrealistic low-tax, high-spend philosophy? Won't investors realise that not a huge amount of our trade takes place with the US, and that as long as we have strong trading links with the EU, everything will be alright? And won't it be seen as a boost to our economy, as investment here might suddently appear more attractive?
Or am I being a hopeless optimist?